On 26 September, Amor Sexton, Blockdaemon’s COO, joined a panel at the prestigious European Blockchain Convention, hosted in Barcelona, on the topic of, “The State of Staking Infrastructure.”
With an institutional focus, this discussion covered a wide swathe of topics related to staking, ranging from how technical staking compares to other DeFi activities, the key focus for regulators, approaching protocol upgrades, scaling opportunities, and more.
View the full discussion here, or read on for key insights shared by the panel.
What is Technical Staking?
Staking involves locking up a specific amount of cryptocurrency to support and secure a blockchain network that uses a Proof of Stake (PoS) consensus mechanism. Participants, known as stakers, commit their tokens to validate transactions and maintain network integrity. In return, they secure rewards, usually in the same cryptocurrency they staked. For example, on Ethereum, validators must stake 32 ETH by depositing it into a smart contract to participate.
While staking focuses on network security, other activities like yield farming, liquidity mining, and running masternodes aim to generate rewards through decentralized finance (DeFi) platforms.
- Delegated Staking: Instead of running your own validator node, you delegate your tokens to a trusted validator who handles the technical work. You receive rewards minus a fee taken by the validator.
- Yield Farming: You provide liquidity to DeFi platforms like Uniswap or Aave by depositing your cryptocurrency into smart contracts. Rewards come from platform activity, including transaction fees or additional tokens.
- Liquidity Mining: Similar to yield farming, but the primary goal is to secure new tokens issued by the protocol as a reward for providing liquidity.
- Masternodes: Operating a masternode involves running a full node that offers additional services beyond basic transaction validation, such as instant transactions or enhanced privacy features. Masternode operators secure rewards but usually require a significant upfront cost in the network's cryptocurrency.
Staking’s Areas of Focus for Regulators
A key takeaway from the panel was the regulatory focus on protecting investors while maintaining innovation, balancing a tailored, risk-based approach to unlock the potential of staking while minimizing risks for participants.
The approach spans across a number of key areas:
- Classifying Staking Services: Staking methods vary. Some involve direct network participation, like delegating to a validator. Others resemble passive financial products, such as pooled staking services. Classifying this helps apply the right regulations and manage risks.
- Transparency/Disclosure Requirements: Users should be informed about how staking rewards are generated, potential risks (slashing, loss of principal), and the underlying protocols. Clear, standardized disclosure rules for staking services could help build trust and protect consumers. This would involve requirements on reward mechanisms, fees, and risk factors.
- Custodial vs. Non-Custodial: Clear guidelines should distinguish between platforms that custody users' tokens for staking (which may expose users to additional risks) and non-custodial solutions, where users retain control of their assets. Ensuring consumers know the implications of each model is critical.
- AML and KYC Compliance: Ensuring staking services comply with AML and KYC regulations without overburdening decentralized or non-custodial services is a delicate balance. Centralized staking providers are more likely to need strict KYC/AML controls.
- Global Regulatory Harmonization: Staking is inherently global, with users interacting across borders. Lack of international coordination could lead to regulatory arbitrage, where services operate in less-regulated jurisdictions. Aligning regulatory standards across major regions will be important for consistency and preventing gaps in oversight.
What is Ethereum’s Pectra Upgrade?
The panel discussed the implications of Ethereum’s Pectra upgrade, expected in Q1, 2025. Pectra combines the upgrades of the Execution and Consensus layer, "Prague" and "Electra."
Pectra is designed to improve user experience (via. smart accounts), reduce network congestion, and to achieve more efficient staking. Pectra also introduces features like peerDAS and increased blob counts, aiming to scale capacity for Layer 2 solutions, enabling higher usage at lower transaction costs.
Regarding institutional staking, two aspects in particular are relevant - Maximum Effective Balance (Max EB) and Execution Layer Triggerable Exits.
What is the Maximum Effective Balance (MAX EB)?
The Max EB proposal allows validators to stake any amount between 32 and 2,048 ETH, enabling auto-compounding of rewards. This removes the need to stake in fixed increments of 32 ETH, enhancing capital and infrastructure efficiency. It benefits solo stakers by allowing organic growth of their stakes, improving decentralization without being disadvantageous to larger institutional stakers. Consolidating validators could also reduce the total number on the network, aiding future scalability improvements.
What are Execution Layer Triggerable Exits?
This proposal lets stakers initiate exits directly through the execution layer, eliminating the need to go through staking providers. It reduces dependency on third parties, mitigates potential risks, and gives liquid staking protocols more control over their node operator sets, removing business continuity concerns and removing the need to store pre-signed exit messages.
Opportunities in Scaling Staking Services
Following the discussion of Pectra, the panel also discussed key opportunities with regards to staking:
- Restaking and Validator Sidecars: The panel highlighted restaking as a way for stakers to maximize the utility of their assets by participating in multiple networks or protocols simultaneously. While restaking protocols like EigenLayer and Symbiotic are still under development, they are expected to become important primitives in the Ethereum ecosystem.
- Development of Layer 2 Solutions: Opportunities exist in creating more validator sidecars, such as pre confirmations for Layer 2 solutions, which can enhance network efficiency and scalability.
Node Operator Risk Standard (NORS)
The panel discussed the Node Operator Risk Standard (NORS) as a positive development for the industry. NORS provides third-party certification to ensure node operators meet enterprise-grade standards for Ethereum validator risk management. Developed collaboratively by industry experts, including Blockdaemon, and with KPMG as the first NORS Qualified Assessor, NORS enhances security and simplifies staking due diligence for institutions.
Stake and Restake with Blockdaemon
Blockdaemon offers a comprehensive staking solution, including a dashboard, reporting, APIs, and in-app staking capabilities.
Blockdaemon was an early infrastructure provider for EigenLayer, actively participating in their Node Operator Working Group and becoming one of the first to support their EigenDA AVS launch.
Blockdaemon has also added single-click support for Eigenlayer as part of a significant upgrade to the staking flow design in the Blockdaemon app. The new UI makes it easier and more intuitive than ever to stake and restake using the Blockdaemon app.
To learn more, book a call with the Blockdaemon team today.
